Good morning, everyone, and welcome to this press and analyst conference covering the Q2 2019. We will, as always, have 2 persons on stage today: our President and CEO, Martin Lalstead and our CFO, John Ytterberg. We will start with presentations, and then we will have the floor open for questions, both from the room and over the phone. Since this is a webcasted event, kindly
ask you to use the microphones.
Martin, take it away.
Thank you, Thor.
So ladies and gentlemen, both here in Stockholm and also on the web, most welcome also from my side to the Q2 reporting of the Volvo Group. And indeed, I have to proudly report that it was actually a record quarter for the group with sales exceeding actually for the first time SEK 120,000,000,000 in 1 quarter, resulting in an operating margin of 12 0.5% and an operating income of just above SEK 15,000,000,000. Good outcome also when it comes to the cash flow, almost coming up to SEK 14,000,000,000. But maybe most proud of seeing the underlying activities resulting in these strong results. The focus of growth, but profitable growth, high quality in the business, high focus on a good price realization given the market conditions and how that is coming through.
But also the focus on continuous flexibility in our different systems. So we are creating the necessary balance between deliveries, inventories, order intake and thereby also creating the maneuverability for the future. Talking about maneuverability. Another very important part of the second quarter has been what we call the events supporting our transformation and being a leader of transformation transforming this industry, the transport industries. We have announced a number of very important partnerships because the future will be about partnerships to really conclude solutions that will take the full advantage of the future technologies.
NVIDIA is one of those, Samsung is another, and also announced the first commercial agreement also how to put level 4 and level 5 automation into place with BERA, as you have seen before. So we are looking for her entrance in the real world. So very strong and solid quarter, and we are very proud. I would like say that colleagues around the globe has done a great job here. When it comes to the volume development, given the strong order books that we have, we continue to see growth in volumes.
As you can see here, 9% on the Truck side, mainly then driven by continuous improvements and increases in deliveries and shipments in North America. Strong development in South America also, in North America for the two brands and in South America then for Volvo. Rather flat development in Europe and also according to the forecast that we have had. Machine deliveries, up 12% and solely driven in this case by SDLG. Volvo, a little bit down, actually -3%.
But SDLG then and mainly then in China, up almost 30%. Service sales development continues. Of course, we have now higher and higher comparison figures with high activity levels already in place 2018. But despite that, we see continuous development in this quarter and the start of the year. If you exclude FX, 3%.
And we have discussed that yesterday, so I can tell you also. I think it's good to see that we have increased with almost 20% now accumulated over the last 2 years. So the strategy is working. It's partly driven by activity levels, but it's also driven by better penetration in different segments. And as you can see, all segments are making a contribution here.
When it comes to the Truck side, market environment, we are doing a number of adjustments. And if we start with Europe, we are adjusting that upwards for the year up to 320,000, meaning that more or less a flat level in comparison to 2018. Main explanation for this is that we have had a stronger start of the year. And while we are calculating the end of the year, we see that with the order bank, we have we will not come down to the levels that we have predicted before. And one explanation of the very strong start, we're up 8% in Europe, is actually the introduction of the second graph in 1st July that has caused a number of preregistration, a little bit higher than expected.
But still, order backlog is also indicating this level. Safe for North America, strong start. Shipments are getting out to the market. And when we look to the complete year, we're also increasing there somewhat from 300 and 10,000 to 325,000. Minor adjustment, but still showing that the activity levels are high.
When it comes
Asia, a small decrease in India from SEK 390,000 to SEK 360,000, and that is primarily related to the tightening financial system and credit systems in India. And for the rest, we are keeping the market forecast unchanged. When it comes to order and deliveries here, what we can start to talk about is Europe again, following the pattern that we have seen. We have on deliveries, we are flat. So as we already reported, when it happened also was actually given our constrained supply situation that we were losing somewhat market share in beginning of the year for Volvo.
But when we'll now look at the order intake, it's following also the pattern that we are expecting for the remaining part of the year, and we are doing the adjustments accordingly when it comes to production. No drama and in line with our forecast. North America, same situation. Even if we see less now drop in order intake, We had more than 70%, as you remember, in quarter 1, still a big drop, and that is still related mainly then to the big order book and the balance there. We have gradually now started to open a little bit more for fleets and selected customers into 2020.
And we are also happy to see that during the course of the year also, the supply chain restrictions that we've had, not at least in the beginning of the year for Volvo, is gradually fading away here. South America, positive, following the trend up to the forecast of 70,000 units, total market and that we can see both in order and deliveries. And when it comes to Asia, it's mainly related to Middle East, countries under sanctions. We have Turkey with economic turmoil. We have also some commodity related markets that are showing weaker signs there like Indonesia and the coal prices, that's one example.
When it comes to market share, we have seen stabilization now in North America, somewhat improvement from Q1 for Volvo. I think, again, high priority on the quality of the business now with these high market conditions and capacity constraints, good balance for us. Same goes for Europe and the same story there for Volvo. When it comes to Mack, a little bit specific situation because in their core segments, they are still gaining market share. But since it's an overweight for long haulage, you see a little bit of erosion year over year.
But when we look sequentially, it's also a solid and expected development. Renault is also worthwhile commenting. I think that the Renault team is continuing to do the job that we had expected: steady, slow market share increases, high focus on the quality of the pricing, price realization and not at least also that we have the right balance with residuals, etcetera. For other regions such as Japan, strong development now. We see that our turnaround program and our improvement program for unit trucks is really working fine.
We see that both when it comes to our underlying improvements in operation, but also when it comes to customer satisfaction and the receivable of our new products there or rather new products like the corn, but we have extended the range there. Brazil, good development as well as South Africa and Australia. We are actually approaching 30% market share totally for Australia. That is knowing that all brands almost are present there from Japan and North America and Europe, I think that is a great achievement.
When it comes to
the Transform part, some of you attended the Capital Markets Day a couple of weeks ago, and we talked about, I mean, the importance of balance between perform and transform. And when it comes to the transform part, we are continuing now to strengthen our ecosystem. And not only talking about the ecosystem, but that was some abstract thing that is hovering around the universe, but that is the real stuff. And in our joint ecosystem, we are now strengthening that with a number of world class partners. And today, we announced then the strategic alliance with the Samsung SDI when it comes to battery technology, development of that and supply for the future.
Very important, obviously, now when we are gradually rolling out electromobility solutions in trucks, in construction equipment, in buses and in the penta business areas as well. The good news here is that it's standing on 2 strong legs. It is, so to speak, the intention of securing now the battery capacity, primarily then on the battery cell level, but also the ability for us to utilize the industrial system both when it comes to modules, battery modules and the last level battery pack of Samsung Industrial System, but then gradually be able to move that into a different part of the Volvo Industrial System as volumes grows so we can utilize also the competence and footprints that we are sitting on in a smart way but take that continuously. The other very important part is that it's a long lasting partnership also when it comes to develop cell technology for utilizing utilization into commercial vehicles and into industrial applications. So we are really optimizing for range, energy, density and durability and other very important performance indicators for our type of applications.
So it's a great announcement, and we have seen it has also gathered a strong interest in Korea that is fine for us. And as you know, Samsung SDI is one of the world's leading partners in this space. Very short on this, we announced that in conjunction with the Capital Markets Day, but it's an important event also during this quarter, the partnership with NVIDIA regarding the development of the vital parts of the autonomous stack into our L4 and L5 applications, both when it comes to hardware and software, where we will have, so to speak, co creation teams, both in California as well as in Gothenburg in order to create these solutions now for the near future. And in conjunction with that also, we announced also the first commercial now application for the Viela Tractor L4 applications together with DFDS. That will be in CMI confined areas, partly on public roads, transporting from crosstalk into the rural terminal of Gothenburg to start with.
So that is another announcement just confirming also that we are taking now commercial steps into this space. Brno will get into operations for the Corium Mining operations at the end of this year. We have the electric side project and now also this project that they are commercial viable. Also in the electric space, we're continuing to move, which is very positive. Now during this quarter, we were revealing also the refuse application based on the modular platform of the Volvo Group for Renault.
This is 26 tonne D Wide 0 emission application that is now rolling out, and we will start, so to speak, ramping up at the end of 2019 beginning of 2020. On Construction Equipment. Also in this area, we see development that we to the majority has predicted. We are not changing the market forecast for this year in any of the regions. And when you see actually the year to date figures for the different regions, it's following also the pattern as expected.
Maybe a few comments on it. In China, we are up 8% year to date, primarily driven by compact excavators. And in North America, for example, it's up 7% market registrations. But in that case, it's mainly driven by more heavy equipment, heavy excavators and articulated dump trucks. So also a fairly expected pattern as we see it.
When it comes to order intake, we all when you look into the different parts of the world and you can also see between the brands, obviously. But if I start a little bit with North America, orders down 5%, and we are guiding for a market up. And the main reason for this is that we have, and that was also valid during the last quarter, we're working also with destocking activity together with our dealers. But when we look at the market share development, that is positive. So I think that the medicine, so to speak, is functioning as expected, and deliveries is also working fine here.
Also in Europe, as a matter of fact, where we are guiding for a flat development now during this year, it's the same situation. We had high order backlog, thanks to big orders in quarter 4 and quarter 1 quarter 4 last year and quarter 1 this year. And therefore, also, so to speak, a small correction, but when we look at the activity level that is following the pattern that we see. And in Asia, a scattered picture. As I said, China, still a strong development when it comes to order intake, plus 20%, mainly then related or solely related to SGLG, whereas India and Turkey, given the turmoil, has shown weaker performance there.
So let's see where India is heading now when the presidential elections are over and we are starting to set the next phase of the second term of Moody. When it comes to Construction Equipment events, one very important event is the upcoming China, 4 emission legations coming into China. And what that will mean is that the technology will continuously now converge, not at least then obviously when it comes to the driveline and the different components around that. And thanks to that opportunity, actually, we have taken the next step of the successful cooperation and joint venture that where we are sitting on the majority, as you know, with SDLG to actually join forces when it comes to above 15 tonne excavators providing the latest Volvo technology and utilize that for solely Volvo branded actually. So we're young in force because when it comes to these more heavy advanced equipment, it doesn't make sense actually to utilize 2 brands because technology will be the most advanced in order to comply.
Very good spirit of that cooperation and well received in the marketplace. On the full electric rollout, primarily now on the compact machinery, it's also going according to plan. The first delivery is now out to the first customers testing this in real environment and one of our most respected global customers taking on those first deliveries, Colas of France. And phase start will be 2020 in more broader terms. On the bus side, it can look dramatic, but everyone that has been following our business for a while know that when it comes to order intake, it's hovering up and back depending on tenders primarily.
When we look at the normal more retail based business, it's actually developing well. Last year, we had a number of big tenders. When we look at the order bank, we are actually 4%, 5% above last year. So here, you need to look in a little bit longer perspective. Good deliveries, mainly into Americas and also Latin America here.
And important breakthroughs also in Middle East for the more advanced also urban transportation systems now coming in Middle East, both in Abu Dhabi and Dubai. So we are very proud of that, and that will give good push for the bus business in the coming years here. On the Penta side, as expected, we have been talking about it, the pre buy effect related to the Stage 5 and an introduction in that happened at the or in the beginning of this year. So deliveries decreased 12%, and order intake decreased with 45%. Still, as you can see, and Jan will come back to that sales.
We're holding up because we have very good mix here. But this was an expected situation, and that will stabilize during the course of the year here. Also, a lot of news, innovations. That is the signage of Penta in its space, the new launch of the D4, D6 and propulsion packages launched, very popular, obviously, as we discussed and did see here before in the introduction. And new D8 also Marine and Industrial application showcased.
And then we're also now starting the electrification journey here, both in the industrial segments and in marine segments with Elsnerblen, for example, in Gothenburg also where we'll test now the first type of ferries with the full electric propulsion system. Financial Services, interesting to see actually. And of course, Jan will come back to the climate around this, but still very high level of competition. So we see that there are still big appetite to be part of our industry, not only from our captive financing but also from other players. And we are given also that there are opportunities to find we will still maintain all our discipline on price and credit.
It's important, obviously, to continue to build a strong platform here. Also, from when you see the penetration level, it's going down a little bit and mainly related to Europe, where we have a market mix effect, where we have a weaker position in in important markets such as France that is still holding up very well when it comes to the vehicle deliveries. And we also got a license awarded now for a finance company in Korea that is important to support our big business in Korea as well. So by that, actually, I will conclude the market part of the presentation and leave the word to Jan to continue the financial presentation. So please, Jan.
Thank you, Martin. And also from my side, very welcome to the presentation. And of course, we are very happy with the financials. So we can conclude that the second quarter was yet another strong quarter with similar trends as we saw in the Q1 this year of increased deliveries, improved capacity utilization in our truck supply chain. We have a better price realization and also an improved mix.
And on the other side, we have more activities on the R and D side that is impacting costs negatively. So if we start with the top line, net sales and look at those per market. In the second quarter, they increased by 17 percent, up to SEK121,000,000,000. Currency effect affected net sales by some SEK 5,700,000,000 and that was mainly related to the dollar that has compared to last year appreciated. And if we take out that effect, we are up 11% where we see increases, currency adjusted, across main truck divisions and business areas.
If we look at the vehicle machine and engine deliveries, they were up 13% in local currencies and reflecting then what Martin was into, the sharp increase as we see in truck deliveries in North America and in Brazil, whereas net sales increase in Europe, if we take out currencies, was rather flat actually. And in Asia, they were currency adjusted going down where we had the decreases in trucks related to Middle East and Southeast Asia impacting negatively, and that was partly offset by the increased deliveries in China then mainly by STLR G then. Despite a continued strained supply chain situation, deliveries were not affected by any supply chain issues. It was sort of a normal situation after some tough quarters end of 'eighteen, beginning of this year as well. Service sales continued to be at a very high level.
You must remember that. We saw an improved service sales by 3% currency adjusted, higher transport demand and increased fleet and, of course, also high demand on uptime impacted and supported this high level of service revenues. If we move over to the results and the operating income. Adjusted operating income in the second quarter improved some SEK 3,600,000,000 up then to SEK 15,100,000,000 giving an operating margin of 12.5%. Except for Penta, improvements were noted across all segments.
And also in this second quarter, we have several of the truck divisions and business areas at record levels. Main contributors, of course, behind this improved result is the deliveries, 10% on trucks, 20% on buses and then 12% on machine deliveries. And on top of that, we have positive impact from, as I mentioned, the capacity utilization in our truck factories impacted positively by the continuous improvement sequentially and also the fact that we have been stabilizing now for a while on high level of production volume, which is also important to drive out costs. Gross income improved also due to a good price realization in general and, as I mentioned, a positive mix being then customer and product mix. This, together with the positive FX effect, contributed then to the SEK 4,100,000,000 increase of gross income.
And if we move over to the indirect costs, we have a high activity in the R and D area. And of course, we have to balance resources and ambitions with the legislative demands. So the paid out expenses increased with close to SEK 700,000,000 compared to last year. Part of that is related to currencies. We also have on top of that a net capitalization that is now becoming more in balance with the amortization in this quarter, but that affected positively
when we
take a look at the R and D costs as such. So all in all, R and D up some SEK 600,000,000. And then looking at the net capitalization and saying something for 2019, we maintain our guidance there that it will be some SEK 1,000,000,000 of positive impact from the net capitalization. And if you
look into the report, you can
see that a big part of that big part of that has already happened here in the 1st two quarters. Excluding FX effect, we can see a minor increase of selling. So there's a lot of FX into the selling increase in nominal terms, and that increase was related to high volume if we take out currencies, whereas the improvement on the administrative side is more related to costs we had last year, which where we have a nonrecurring item in the second quarter. And other improved SEK 400,000,000 over SEK 400,000,000. That was an effect of a divestment made by Vodval Venture Capital that had a gain of some SEK 200,000,000 in the second quarter and also the fact that we had some positive nonrecurring items this year and we had some non negative nonrecurring items last year.
So that makes the difference a little bigger. But the big thing here is the SEK 200,000,000 of divestments. Currency, all in all, impacted operating the transaction And the transaction effect for the full year is now expected to be some SEK 2,000,000,000, but we don't give any forecast on the full FX effect on operating income for 2019. If we move over to the cash flow from the industrial operation, there is a seasonal pattern. I think you know that, that we have a Q1 that is a little tougher when we are building up inventory.
And in the Q2, we come into more stable situation as it relates to working capital. And also, normally, we have strong earnings impacting the cash flow positively in the second quarter, and that was also the effect. So this year, Cash flow in industrial operation was SEK 13,900,000,000 Of course, the strong operating income is one impact and also the fact that we had a rather stable working capital actually impacting slightly positively where we have SEK 2 point 6,000,000,000 of inventory decrease, and that is the biggest and related to Volvo Construction Equipment. On the other hand, with the high volumes, we have higher receivables, minus 2.8% and then somewhat plus on trade payables. Capital expenditures in the second quarter were some SEK 2,600,000,000, where we have then somewhat higher capital expenditure for property, plant and equipment and, of course, the capitalization of R and D expenses.
As regard, capital expenditure for property, plant and equipment, they were somewhat higher than last year, and we expect that trend to continue year on year going forward. And that means that we also got an effect on net cash, which was positive. But of course, the big thing here is the dividend paid out in the Q2 beginning of April, ordinary and extra dividend of in total SEK 20,300,000,000 and of course, partly offset by the SEK 13,900,000,000 of cash flow in industrial operation. If we move over to the business areas and segments, start with Trucks. The positive momentum from earlier quarters for trucks continued also here in the second quarter.
Currency adjusted net sales up 11% to some SEK 76,000,000,000 mainly related then, of course, to the truck deliveries up 10% and also, of course, the service increase of 3% currency adjusted. Higher truck deliveries, North America, Brazil, whereas we saw a limited increase in Europe as relates to trucks. That is related to Western Europe, where we have then offsetting decrease in Eastern Europe and in Eastern Europe to fleets. Asia was negatively impacted by lower deliveries to Middle East, Turkey and some countries in Southeast Asia then. That meant that operating income increased by SEK 2,300,000,000 to SEK 9,500,000,000 giving an adjusted operating margin of 12.6 percent for Trucks.
A main effect here, of course, being the volume contributing very positively to the operating income. And on top of that, we have the capacity utilization and efficiency in production, mainly related to the American system, good price realization and also here somewhat positive customer and product mix effect. Partly offset by higher R and D and selling, and FX had a positive impact of SEK 0.4 billion. Construction Equipment. Here, we can see that the improved currency adjusted net sales of 6% reflected a 12% increase of deliveries.
Martin was into that, mainly related to SDLG, China and compact machines, whereas the Volvo branded products actually decreased deliveries with some 3%, where we had increases in Europe and North America, not fully offsetting the decreases we had in Southeast Asia and Turkey. Currency adjusted service revenues were more or less flat, a little up 1%. That is an effect of a slowdown in certain Asian countries. And year on year improvement then for construction equipment is then SEK 475,000,000, continued the positive trajectory of improved margins to SEK 4,153,000,000 of total adjusted operating income and a margin of 15.5%. The improvement was mainly then related to the 12% increase of deliveries, which offset the deterioration of capacity utilization in the industrial system.
And that was then, of course, mainly related to the Volvo branded products to reduce stocks and also to prepare ourselves for lower the lower order intake we have seen. FX impacting positively with SEK 340,000,000 And moving over to buses. We continue to see an improvement there also here in the second quarter. The deliveries on new buses increased from 4 50 units, positively affected by the Trans Millennium order in Bogota and also to some deliveries into the San Santiago system in Chile as well as higher deliveries in North America. That meant that the vehicle net sales up 25%, services were in local currencies up 5% and the improvement of adjusted operating income also SEK 145,000,000 to SEK 403,000,000 was related to the deliveries and where we though had a negative market mix effect and also as well as some deterioration in our industrial efficiency.
Positive impact from FX being then SEK 125,000,000 in the quarter. Penta, in a spot we are not used to them to see, the Q2 2019 continued then to be negatively affected by the high prebuy deliveries we experienced end of 'eighteen ahead of the Euro Stage V introduction. The general decrease in industrial engines was partly offset by growth in heavier of heavier engines into the segment of a data center backup supply. Deliveries of marine engines, diesel ones being in line with last year, gas engines going down, and that is due to certain distributors destocking. Total engine deliveries down then 12%, but the heavier mix more or less compensated that drop, being the net sales more or less flat of engines, currency adjusted and service revenues were also more or less flat where we see activities among customers to adjust their inventory levels, and that affected the Q2.
So compared to a very strong quarter last year, adjusted operating income decreased some SEK 90,000,000 to SEK 680,000,000 mainly then related to the lower deliveries and higher level of R and D expenses, reflecting then the amortization of Euro Stage 5 applications and also high activities in the area of electromobility and digitalization. This was partly then compensated by the higher or the improved product mix, the heavy product mix. And FX had a positive contribution here as well by some SEK 70,000,000 operating margin deteriorated to 16.9%, still a very good margin. Financial Services. Here, we can see that the strong demand of vehicles and machines continued to affect the new retail financing volumes positively.
They increased slightly up to SEK 20,900,000,000 in the second quarter, and the portfolio continued to performing very well, reflecting then the general good business climate among our customers, resulting then on low amounts of overdues and credit losses. The credit portfolio increased to SEK 165 1,000,000,000 towards the end of this quarter. And currency adjusted, that means an increase of 13% compared to June last year. And as Martin was into, we see a tough situation on the customer financing market putting pressure on both spreads and our penetration. And adjusted operating income then improved from SEK 100,000,000 to SEK 680,000,000 where the portfolio increase was then partly offset by the lower spreads and also somewhat increased credit expenses, negatively affected by the requirement to make upfront provisioning according to IFRS 9.
FX had a positive effect of SEK 30,000,000 and profitability level stayed on as relates to then return on equity stayed on a high level of 14.7%. Then Martin.
Yes, Jan. Yes. Thank you. David, to conclude, I think to give a perspective on this quarter again, strong and solid quarter, record sales, record results, Operating cash flow really translating into good numbers. But most important, good activities around that.
We know why, and we know why that will continue to actually proceed with the group. Good underlying profitability development, good price discipline and good balance now between orders deliveries and continuous focus on the inventory levels, but also creating the continuous flexibility to have the maneuverability for the future. And finally, transformation continues and a strong announcement of partnerships and commercial agreements in the areas of automation and electromobility. So very well done by all colleagues in the group. We are proud of that.
Thank you. And then I promised also at least to show this very important slide that we have the Volvo Group Investor Meeting at the North American Commercial Vehicle Show also coming up in October. Thanks for that commercial. We will open up for
some questions, and I can see that we have one up here.
Agnesh Cavaliella, Nordea. I have two questions, please. The first one is that given the order intake trend right now, it seems like you are bracing for a bit weaker H2 already. Can you help us and tell us how much your production rates for trucks will come down in, say, Q3, Q4? And also, how flexible are you when it comes to the cost side?
Do you plan for any larger cost savings projects already?
When it comes to the market outlook, I mean, it might be so that take a little bit time to explain that. I think that is an important part. I mean, when you look at if you start with Europe then, when you look at the development, I mean, up to May, we're up 8% in the market. We are flat, and that is basically related, as I said, to our initial loss in market share and the priority of the quality in the business given the high situation. Now when we are comparing 2018 2019, we are guiding for a flat market more or less.
And that means mathematically approximately 8% lower market in the 2nd part of the year. And that is also following very much what we see in our order trend for European markets. So I mean in that magnitude, I think you can a little bit look into what we are after. That is not I mean, we are coming from high levels. We have been working really on the stretch of the system here.
So we are continuously now adjusting also given the fact that European system is also supporting some of the international markets that also have shown a little bit weaker demand. But it's still on levels where we can support a good, so to speak, flexibility and a good level of productivity. So that is what we can say about Europe. But we are well prepared. We have been working on it.
We have said that, as we also discussed in 2016, for example, 2015 and beginning 2016, that priorities for the group to show that show to ourselves and to everyone that are interested in that we can actually handle. I mean, we are in a cyclical business. So that is a normal type of activity. When it comes to North America, it is still a little bit too early to say. I mean, we are still into this correction between order book, inventories, order intake and deliveries.
I mean, still very strong support of the deliveries. We see that the order book, as we have worked with it and has a good level of quality into that, no big changes. But I think we also should recognize the fact that there are coming in some data among transporters, for example, that they are seeing a little bit of weakening demand and which is also expected. So at the end of the year, there is probabilities also for an adjustment according to them. But I think we showed that very well that we have the flexibility measures in place for that.
And on a second note, I can say that I'm a little bit surprised almost about the fact that people are seeing that I mean, the economic cycles are going up and down as something that is new. I think that we will have to live with that also in the future. It will go up and it will go down, etcetera. I think the good news is that we have a long lasting good development when it comes to transport demand in the world, and that will continue to increase.
Okay. Perfect. So basically, you don't plan for any kind of big bank cost savings as of yet, but you're more flexible? Yes.
And I think that is the part of the game also. I mean, if we are sincere about the fact that we are believing in the centralized system with strong P and Ls, both regions and brands. I think we should talk with double time if we're at the first sign of a downturn in some markets, we'll start with a big program because one size will not fit all here. We are seeing markets that are going up and that have a very strong development, and they need to live on their merits. Latin America, for example, we still see a number of European markets with strong development.
And my firm conviction is that this type of big programs and is the story of yesterday.
And then my last question is on the service business. You had organic growth of 3% in the quarter, so the growth rate has been coming down from the previous quarters. And can you just explain what's happening when it comes to utilization of the machines and trucks? And then also, what could we expect from that service business when it comes to the growth over the next couple of quarters?
Thank you. 1st and foremost, as you say, I mean, to just take 1 quarter can be a little bit premature to do any more wide conclusions about it. Having said that, I think a little bit the sentiment of the market moving sideways is also given our parts of the retail and distribution system also time to consider, okay, but with our stock levels, I mean, when you are in a very high activity level, you're obviously more thinking about having the right availability. It will be consumed. So that might be one explanation premature to say.
The comparison figures, as I said, I mean, we have been growing pretty well over the last couple of quarters years and I mean, the comparison figures here. And then I think there are a number of markets where it's a little bit of, I mean, hesitation also utilization. So it will probably be a mix, but no drama. I think the good news, to your point, is that there are still good rooms for continuous also penetration improvements into this business. We see that when it comes to contract penetration that we have still big differences and swings between both markets and regions and applications.
So here, I think we should continue to expect that we focus on the potential that exists already, even in the flat or in the possible declining market.
Erik Olraang, SEB. Three questions. The first one on pricing. I mean you've been good at price realization at the start of this year, I guess partly for market reasons, but also for company specific reasons with a tight system. You lost a bit of share on that.
Is it reasonable to assume now that with demand on a lower level that the sort of prices on new orders is perhaps not as strong as they were in Q4 and Q1?
1st and foremost, thank you that question. I think that is important. I mean, as we said, when you're in a situation with very high capacity utilization, as we said, We took a step back and said really, how shall we prioritize now? It's always tempting to go for the last unit, but that can be gold plated, so to speak. So I think that balance function well even if it's partly was a little bit frustrating with the supply chain issues we had primarily in the beginning of the year and the last year as well.
Having said that, I think that would be a continuous priority for us. I mean, we see us as one of the premium players, and we have a strong responsibility, we feel, for also being consistent with our pricing. So that is our intention on that side. I don't know if you would like to add.
Nothing to add.
Thank you. Then the second question on the what you about on some of the machine ranges on FCLG transitioning to Volvo brand only. I mean given the market development with quite big market share gains for the local brands over a longer period of time, and I think also with the Volvo brand struggling to keep its share and some of the bigger players really struggling. Why does it make sense then to
move this to charter transition to Volvo only? I think it's very important. I mean, 1st and foremost, we are talking about, I mean, the bigger segments above 15 tons, where still we have very strong presence and where we feel also with the conversion of technology that we would like to make the statement also that we have 2 strong brands where SDLG with a very strong presence in wheel loaders, but also when it comes to compact machinery and, so to speak, the more general purpose type of excavators should continue to drive that. But we also see the opportunity by doing this that also joining forces and combining our commercial networks in small places. So we actually are utilizing the fact that we have strong 2 strong legs with special, so to speak, offering.
So this has been careful consideration. But given also our strong local management, not at least coming from FDLG, but also from the Chinese part of the Volvo organization. This is a decision that we all believe in given technology needed to really put in the latest one and drive that at the same time as keeping the spirit of the 2 brands, so to speak. So that is the logic behind that.
Thanks. And then the third question on the balance sheet. And I guess the cash position is tracking ahead of where it was this time last year. Of course, anything could happen to the economy. But if you look at your own priorities and investment needs and so on, is there any need for why you should need sort of a stronger balance sheet leaving this year than you did last year?
Well, it's not a question for us actually. It's something for the AGM. But of course, we need to be prepared. And as we have stated before, we would like to ask from a platform of strength. Whether that is X on net financial cash position or not, that is nothing actually that we discuss or reveal.
It's also depending on the situation, of course.
And the timing is a lot at the end of the year. But I mean just to add to what Johan said, I mean we have also several times stated that we have no intentions to be in a bank. We think you're doing that better than us. So except for the Financial Services where we are standing, I hope, and Scott, we can agree with that.
Thank you. Anyone else here? Or should we see if we have We have one here, yes.
Thank you. Johan Danske Bank. A question on production in North America. Again, you stress that you may be revising production, of course, by the end of the year. Are you Given that we are at very high levels right now and also we see decreasing freight rates and lower pricing on load, etcetera, Are you concerned about that we could see pretty sharp production cuts?
Or how do
you Let's put it like this. I think this is also, of course, a valid question given the history of the North American, so to speak, volatility. And I think the short answer in that is that in order to have a good and steady performance in North America, I think we have learned that over many years now the hard way, that being very well prepared for different levels of flexibility, and I think we were taking down, what was it, at least was it 39% or in 2016? And that functioned according to the plan and also with, so to speak, a good support when it comes to margin, both from the service side but also the flexibility in the Industrial System. So without answering, I mean, yes, we are prepared.
And then let's see there because there you can see it and speculate. I think the most important is to have a firm conviction that when you're adjusting, do it because when you're starting to adjust, as I normally say, I've never been in a situation of my 30 years in this industry where we have been running dry off of inventory in a downturn. So it's always an opportunity to increase if necessary. I think it's more the timing and that you're doing that with the right timing and firmly, so to speak. So let's see.
But we are well prepared, have a good flexibility of that. And I think, again, 2016 showed up very well.
And a question on the Services. Can you say something about earnings resilience or drop through on the Service business?
I mean, you know my answer to that. What we always say, it's better than equipment, but the considerably lower, so to speak, volatility on Day that we have a considerably lower, so to speak, volatility on Services. And we expect that pattern to continue, not at least also given the better penetration of the CapTiv components in North America as one example.
Thank you.
All right then. Should we see if we have anyone on
the telephone as well? Go ahead.
Thank you. And the first question comes from Graham Phillips, Jefferies. Please go ahead.
Thanks. Good morning. Thanks, Martin and Jan. My question is around European production and also a bit more about the battery announcement. Just on the European production reduction, so you're guiding to sort of be down 8%.
Is this different to what was announced with the Tuva plant summer shift reduction back at the beginning of June? Or is this sort of a new announcement looking into the second half?
No. I think thank you, Graham. That is obviously related to that. I mean, we started early, as I said, because when you have this type of development, you want to be early out. You have always a possibility for an upside.
So that was related to that.
Okay. And just on the new battery announcement with Samsung. Can you just explain a little bit more about this? How does it differ from what you've been using already with your extensive electric bus network? What sort of capacity vehicle range expectations to be able to get from the packs that you'll be getting from Samsung?
Is it which segments they're going in? And why did you choose Samsung? Because obviously, there are some other larger established players like LG Chem, CATL and Panasonic. So perhaps if you could talk a little bit more about that.
First of all, to start maybe with I mean, we have done a thorough evaluation for our needs, obviously, and our specific needs of having the full resources of focus of commercial vehicle and industrial equipment applications. And in that evaluation, given all the different aspects, we found, I mean, there are a number of very good and strong players, as you say, about Samsung to be very good fit for us in this. And as I told you, it's standing on 2 very important legs. I mean, it's the capacity, so to speak, supply capacity for the future that we are foreseeing also giving the ramp ups in different type of segments. But it's also the very tight development of application based, so to speak, development of cells for our type of application.
So as you know, in this space, the development is moving very quickly. We will see a number of generations coming out, both as comes to energy density, but also when it comes to price levels and when it comes to how you're actually utilizing, so to speak, the cycling of it because it's not about only the full energy content. It's also about how much of the energy content you can use in different cycles in order to also have the right type of durability of the battery. So I think what is new about it is a more thorough type of cooperation where we are actually modularizing from the cell design into the modules and eventually the packs and eventually into the vehicles or to the different type of construction equipment. That is, so to speak, a full modular platform.
Another part that is important to us is that we have the ability to, together with Samsung, decide also the depth of engagement when it comes to the industrial value chain because both when it comes to competence, already existing investments, the phasing in, phasing out and location close to production of the final units are all factors we are considering. And there, we have a good flexibility together with Samsung. So a lot of good factors coming together.
So is it actually envisaged for heavy trucks? And again, is this who you've been using for buses?
Yes. And this will be a part of a modular platform because one of the strengths of group is obviously that we are both on the hardware side, starting from the batteries or from the cells, the packs and the modules or the modules and the packs, but also the electric components, the software systems, building a modular platform where we then can pull for the different applications, whether we talk about buses, excavators, wheel loaders, light, medium, heavy trucks, marine and industrial applications. So far, we have not found a utilizing factor for that into the Financial Services business area. But for the rest, they are actually very interested.
And when do you expect the first supply of these to come?
That we have not announced yet. But I mean given the fact that we have, so to speak, also good cooperations also in other areas, we will complement the current offering with also these partnerships. So I will also say that we are continuing to work on that. Absolutely, Graham. You're more than welcome.
Do we have anyone else on the phone?
Yes. So our next question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is now open.
Yes. Thanks for taking the question. So I know a lot of questions have been asked about the North American truck guidance. It obviously appears was 5% despite the fact the market's up 20%. And I understand the order intake is quite the decline is quite sharp.
I guess the question is, when you look at the order intake decline, how much of that is being done by yourselves versus the market demand dynamics? It's sounding more and more now that the order intake decline is really market determined, whereas in the past, I thought that maybe some of that was determined by yourselves, perhaps pruning to get more high quality customers?
Yes. Thank you for that question, Tom. I think to your point, I mean, up to now, I should say that we have deliberately been holding down a big part of the order intake in order to really make sure that we have the right visibility. We have gradually, as I said also in my presentation, started to open up for 2020. But up to mid this quarter, we have been very prudent of doing so because we have said that also given the market dynamics that there is no need actually to continue to hedge volumes for our dealers and eventually customers.
So up to now and when we see the order board, etcetera, for this year, it's still solid and also with quality, and we see a few movements there. Having said that, and that has also been mentioned, I mean, there are a number of indicators also coming in now when it comes to the freight indexes and a little bit also from the reporting of Transport and obviously, all the contracts we have of a more softer, so to speak, side of the market. And so I think we should be prepared for a good flexibility there. But still, we are in July. And there is I mean, we should not, so to speak, see that we have not opened fully yet that we cannot adjust if needed.
So gradually now, we will more test the real demand of it. But I think we can expect also that there is a probability of some adjustments when we are coming to the end of the year. But again, we have a good flexibility for it.
Okay. And my second question, if I may. On the Capital Markets Day, you called for a 10% margin through the cycle. Just seeing like the cyclicality of this business and obviously seeing it in the order book, as well as how you're being conservative on or maybe not conservative, but just how the guidance looking on North America truck, for example, how confident are you in that 10% through the cycle margin? Is that more of a target?
Or is that really something you believe you will achieve? I understand some of that has to do with increasing service revenues, but just trying to understand that better given obviously this is such a cyclical industry, Just love some color there.
We do have a financial target. So of course, it's a target for us to see to it that we are over 10% over cycle. But I mean, we are just the DIF was launched 2 years ago more or less. So it's a little early to say will we make it or not. But of course, we are gradually moving up our level, and that's very important.
And service is one important part of that, both in up in strong markets and in weak markets. So I don't know if you would like to add something much.
No, no. And I think we have been saying that also. And remember, we lost last time we reiterated that statement was actually, probably I don't remember it was Q1 or the Capital Markets Day. But we said that the Q1 result was good. But still, I mean, if we should be in the good part of the cycle and really follow through here, we still have improvements to be done, and we have been doing this quarter as well.
And I think we should say also, I mean, okay, sales were up with what was it with 11%. 11% 11%, ex FX. But also when you see the I mean, the underlying improvements in this market is good, but still also we have a lot of activities that is improving the underlying business that, that will continue to demand. So this is absolutely a target that we should achieve. And that is also necessary for us given also the future and to be leading when it comes to the transformational portfolio.
And I also made a statement at the Capital Markets Day that half of the improvement that we have seen between 2016 to 2018 was own achievements and the other was more related to external effects like market you're into here.
All right. Then do we have a last caller before we conclude this conference? Go ahead.
Thank you. The next question comes from the line of Olof Soderholm from ABG Sundal. Please go ahead. Your line is now open.
Yes. Hi. It's Olof with ABG. I just wanted to ask a question about Latin America, actually, if I could. That market is recovering.
It's, of course, smaller than the others. But what's the what do you think about that market going forward? Does it have the underlying drivers to stay strong or stronger for a couple of years? Or is this just a 1 year event with a small recovery?
Yes. As you know, Olof, I mean, to predict more in Latin America then, I mean, if you can do that with good position, then you should do something else than being president. But having said that, I think when we look at the fleet age, when we talk to our customers, there is the fleet renewal need. There are a number of very solid businesses. And now when you're coming to that type of the cycle of the fleet age in Latin America, not at least in Brazil, I think we can actually I mean, we see the momentum continuing.
You saw a strong order intake now. We are predicting a 70,000 market. And I think that is supporting a certain stability for a period of time without guiding too much into 2020. But it's an important market for us. Mean and also, when you look at and the mix and the segments, I mean, we are about 21% now, including CMI Heavy.
So in the Heavy Duty segment, we have a very strong I was
I was just adding that taking a look in the course we have here into the past, you can see that high deliveries in 'eleven to 'fourteen is now celebrating 8 to 10 years soon. So of course, that will in itself create in Brazil at least then.
It will pay off in good demand.
Yes, it will pay off in replacement demand. Perfect. Thank you very much.
Thank you. All right then. Thank you for showing up, and see you next time in 3 months' time. Thanks.
And have a nice summer, yes.
Nice summer.
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